The Basel Process and Recent Work to Address Financial Stability Issues

Transcription

1 The Basel Process and Recent Work to Address Financial Stability Issues World Bank/IMF/Federal Reserve Seminar for Senior Bank Supervisors from Emerging Economies Washington, DC 18 October 2010 Elizabeth Roberts Director, FSI 1

2 Everyone wants in on the action! 2

3 Selected Public Sector Policy Response to the Crisis Public Sector President s Working Group on Financial Markets, Mar 08 Senior Supervisors Group: Observations on Risk Management During Recent Market Turbulence, Mar 08 FSF Report: Enhancing Market & Institutional Resilience April 08 CGFS: Central Bank Operations Response to Financial Turmoil Jul 2008 FSF Report: Follow-up Implementation Oct 08 Summit on Financial Markets & World Economy Nov 08 G-20 Communiqué Nov 08 March April May June July Aug Sept Oct Nov Jan BCBS, April 08 Steps to Strengthen Resilience of Banking System BCBS, Nov 08 Comprehensive Strategy to Address Lessons of Banking Crisis BCBS BCBS: Scaling for Complexity in Implementation of Pillar 2 BCBS, Aug 08 Range of Practices & Issues in Economic Capital Modelling BCBS, Sept 08 Principles for Sound Liquidity Risk Management & Supervision BCBS, Nov 08 Supervisory Guidance for Assessing Banks Financial Instruments Fair Value Practices BCBS, Jan 09 Enhancements to the Basel II Framework -. - Pillar 2 BCBS, Jan 09 Principles for Sound Stress Testing Practices & Supervision 3

4 There is some logic to the process Basel Committee Joint Forum IOSCO IAIS 4

5 For most issues, there are clear assignments The three standard-setters are very much in charge of establishing globally accepted supervisory policies and practices The IMF (and to a lesser extent the World Bank) has established itself as the international police force (FSAPs, ROSCs, etc) The Financial Stability Board is now the leading group for giving guidance and direction to other interested parties, including the standard-setters Much of the work takes place at the BIS in Basel, Switzerland 5

6 The BIS An international financial institution that fosters monetary and financial cooperation globally A bank for central banks (no dealings with the public) A centre for economic and monetary research An agent and trustee in many international transactions 6

7 The BIS The BIS is owned by 56 central banks The Board of Directors is comprised of the heads of the G10 central banks plus China and Brazil Total assets of approximately $150 billion 550 employees Headquarters in Basel Rep offices in Hong Kong and Mexico City 7

8 The BIS The BIS serves as the home to many international committees Basel Committee on Banking Supervision Committee on Payment and Settlement Systems Committee on the Global Financial System Financial Stability Board International Association of Insurance Supervisors International Association of Deposit Insurers Financial Stability Institute (FSI) Leads to the expression the Basel Process 8

9 The FSB An international body established to address financial system vulnerabilities and to drive the development and implementation of strong regulatory, supervisory and other policies in the interest of financial stability Has a broad-based agenda for strengthening national financial systems, as well as global stability Diagnosis of problems Policy development and coordination Monitoring of and follow-up on implementation 9

10 The FSB Early work of the FSF related to the Asian financial crisis and the LTCM debacle Focused on issues in developed financial centres Major change came with the onset of the financial crisis of FSB launched in April 2009 as a successor to the FSF expanded membership broader mandate enhanced operating structure 10

11 FSB membership National financial authorities central banks supervisory authorities finance ministries International financial institutions International regulatory and supervisory groups Committees of central bank experts Total of 69 members 11

12 What is the Basel Committee? Established in 1974 as a forum for international cooperation in banking supervision (formerly within G10 countries and between G10 and non-g10 banking supervisors) Quarterly meetings of the heads of supervision from member countries Supported by numerous working groups and task forces Secretariat provided by the BIS Used to report to G10 central bank Governors now to Governors and Heads of Supervision (GHoS) from 27 countries 12

13 Legal status of the Basel Committee No legally binding regulations Rather, the members have committed to implementing the Basel standards in their respective countries No authority over non-member countries but viewed as yardstick for banking supervisory standards globally Market pressure on countries to adopt Basel standards 13

14 Types of work of the Basel Committee Exchanges of information Sound supervisory practices (recommended to members and supervisory authorities around the world) Binding minimum standards (1988 Capital Accord, Basel II/III) 14

15 One response to the crisis: broader membership In mid-2009, the Committee broadened its membership from 13 to 27 jurisdictions (24 to 44 organisations) G20 countries that were not on the Committee Hong Kong SAR and Singapore Committee s governing body (GHoS) similarly expanded (normally meets twice a year) Creation of Basel Consultative Group (meets two or three times a year) 15

16 Basel Committee members Argentina India Saudi Arabia Australia * Indonesia Singapore Belgium * Italy South Africa Brazil Japan * Spain Canada * Korea * Sweden * China * Luxembourg Switzerland * France * Mexico * Turkey * Germany * Netherlands United Kingdom * Hong Kong SAR Russia United States * * Country is represented by the central bank and a supervisory authority 16

17 Basel Committee Standards Implementation Group Policy Development Group Accounting Task Force Macroprudential Group Validation Subgroup Risk Management and Modelling Group Conceptual Framework Issues Subgroup Operational Risk Subgroup Research Task Force Financial Instruments Practices Subgroup Task Force on Supervisory Colleges Working Group on Liquidity Audit Subgroup Task Force on Compensation Definition of Capital Subgroup G20 High Level Working Group Task Force on Monitoring Standards and Procedures Basel II Capital Monitoring Group Trading Book Subgroup Basel II and Capital Workstreams 17

18 What is the Basel Committee best known for? Most famous work to date are the three Cs: the Concordat the Core Principles for Effective Banking Supervision the Capital Accord (now Basel I, II and III) 18

19 The Concordat 1975: the Basel Committee issued this document setting out the basic responsibilities of home and host country supervisors Only five pages long! Basic premise: no foreign banking establishment should escape supervision Responsibility for liquidity rests primarily with the host supervisors Responsibility for capital adequacy rests primarily with the home supervisor Need for information sharing 19

20 The Concordat 1983: the Concordat was revised to emphasise the need for consolidated supervision 1990: the Concordat was supplemented by 1996: The Supervision of Cross-border Banking Many other documents published related to this critical topic 20

21 The Core Principles for Effective Banking Supervision Issued in 1997 after a year-long multinational process 1998 survey of over 100 countries regarding implementation Ratified at 1998 Sydney ICBS but needs more meat Expanded through the Core Principles Methodology Revised in 2006 and discussions now under way in the Committee to have a second round of revisions initiated 21

22 What are the Core Principles? The Core Principles are a set of supervisory guidelines or principles aimed at providing a general framework for effective banking supervision. They are intended for G-10 as well as non-g-10 countries To be used as a reference document by national supervisors and international institutions Contribution of the Basel Committee to the objective of "strengthening supervisory standards in emerging and developing countries 22

23 The Core Principles cover a broad range of topics: Supervisory objectives and powers Permissible activities Licensing process Approval for changes in ownership and activities Prudential regulations and requirements Arrangements for ongoing banking supervision This is why they serve as the foundation for an effective supervisory system 23

24 Objectives of IMF/World Bank assessments FSAPs, ROSCs Determine whether banking supervisors are able to supervise the banking industry in an adequate and effective manner Propose a course of action to address identified weaknesses 24

25 The Basel Capital Accord (Basel I) This multi-year project was finalised in 1988 with the issuance of the paper International Convergence of Capital Measurement and Capital Standards (Basel I) A common definition of capital and risk-weight categories was agreed It represented the first time that a capital standard would be applied across numerous countries Intended for the G10 countries but ultimately adopted by virtually all major jurisdictions It was also the first time that the Committee had issued a standard that had a bite 25

26 From Basel I to Basel II In the late 1990s, the Basel Committee, in recognition of weaknesses in Basel I, began to develop a more risksensitive approach to capital adequacy calculations This included specific recognition of the need to hold capital against operational risk (market risk had been added to Basel I in 1996) It also included two new pillars: the supervisory review process (Pillar 2) market discipline (Pillar 3) 26

27 From Basel I to Basel II Tier 1 & Tier 2 (& Tier 3) Capital Credit Risk Risk-weighted assets measured by: Standardised Approach or IRB approach - Foundation - Advanced Credit Conversion Factors x x Market Risk Capital charges measured by: - Standardised Approach or - Internal Models Approach Operational Risk Capital charges measured by: - Basic Indicator Approach, or - Standardised Approach, or - Advanced Measurement Approaches 8 % New elements in Basel II Major modifications in Basel II Same as in Basel I 27

28 Basel II structure Three Basic Pillars Minimum capital requirements Supervisory review process Market discipline Risk weighted assets Definition of capital Credit risk Operational risk Market risks Core Capital Supplementary Capital Standardised Approach Internal Ratings-based Approach Basic Indicator Approach Standardised Approach Advanced Measurement Approaches Standardised Approach Models Approach 28

29 Pre-crisis problems Too little capital and much of it of questionable quality Excess market liquidity and the search for yield Weak governance and risk management Perverse incentives (salaries and bonuses) Poor underwriting and excessive risk taking System-wide risk and interconnections Deficiencies in regulation and supervision Perimeter of regulation insufficient Procyclicality of the banking system 29

30 Business models Originate-to-hold Raise retail deposits and grant loans which are held on B/S till they mature High customer focus Assets Loans Revenue interest income Liabilities retail deposits Credit origination, servicing and monitoring performed by the same bank Originate-to-distribute Originate/outsource loans and distribute through securitisation. Not retained on B/S - Incentives for credit risk assessment? Securities Fee income Wholesale funding Split up into several distinct activities performed by several separate entities 30

31 The age-old problem Lower capital higher returns for shareholders Lower capital smaller buffer to cover loan defaults and investment losses Less liquidity (more maturity mismatches) higher interest rate margins and profits Less liquidity higher bank exposure to sudden withdrawals of deposits and difficulties rolling over debt Left to make the decision themselves, banks will typically opt for too little capital and too little liquidity 31

32 The age-old problem The recent financial crisis reminded us that: the upside of these risks belongs to shareholders and bank management but a significant portion of the downside risk is borne by society in general, most especially taxpayers capitalize profits and nationalize losses this is especially true for too big to fail institutions The size of a bank s capital and liquidity cushions determines how much of the risk belongs to the bank and how much belongs to all of us 32

33 Capital Basel II s role in the crisis Basel I was in effect during the build-up to the crisis limited scope (credit risk) limited risk sensitivity (limited risk weight categories) perverse incentives led to regulatory arbitrage Crisis has affirmed the need for a better capital framework improved risk management improved supervisory understanding of risk better implementation and transparency 33

34 Strengthening Basel II Not only more capital but higher quality capital Better risk coverage Failure to capture key risks amplified stress Enhanced treatments for: Trading book Off-balance sheet exposures Securitisations and external ratings Counterparty credit risk Address any excess cyclicality and promote countercyclical buffers Non risk-based measure to contain leverage 34

35 Strengthening Basel II In 2009 the Committee issued two important documents, among others, in response to the recent financial crisis: Enhancements to the Basel II framework, July 2009 (includes supplemental Pillar 2 guidance) Strengthening the resilience of the banking sector - consultative document issued in December

36 Risk management and market transparency Focus today is on quantitative measures But also significant enhancements to existing requirements for risk management, corporate governance and market transparency already introduced by the Basel Committee Pillar 2 and Pillar 3 enhancements Various guidance (on stress testing, valuation, compensation ) 36

37 Implementation issues Impact assessment started at the beginning of 2010 Calibration to be completed by the end of 2010 Phase-in certain reforms over time so as not to impede the recovery of the real economy Implementation is crucial Standards Implementation Group All these efforts in support of FSB and G20 reform agenda 37

38 Basel III 38

39 Basel III what is it? Basel III is a comprehensive set of measures to strengthen the regulation, supervision and risk management of the banking sector These measures aim to: improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source improve risk management and governance strengthen banks' transparency and disclosures The reforms target: bank-level, or microprudential, supervision system-wide, or macroprudential, risks 39

40 What about Basel II? Basel II is NOT dead nor is Basel I they continue to be viable capital standards Basel III does NOT replace Basel I or Basel II rather it supplements these two standards Basel III is about more than just capital ratios 40

41 Basel Committee s reform package broad objectives Strengthen micro- and macroprudential frameworks Increase financial system s shock absorbers Reduce channels of procyclicality Address externalities of systemically important firms Review perimeter and scope of regulation Strengthen governance, risk management, transparency 41

42 Committee s reform package key elements Stronger capital framework increase significantly the quality of bank capital increase the coverage of bank capital increase the required level of bank capital Larger capital buffers / reduced procyclicality Robust global liquidity standards Enhanced governance and risk management guidance Better cross-border bank resolution frameworks Greater emphasis on macroprudential supervision 42

43 The process to develop Basel III July 2009: Enhancements to Basel II December 2009: proposals published for consultation Strengthening the resilience of the banking sector International framework for liquidity risk measurement, standards and monitoring more than 300 comments received July 2010: agreement on the overall design of the capital and liquidity reform package September 2010: agreement on the calibration of the new rules and on the transitional arrangements More to come before the end of

44 Stronger capital framework Larger capital buffers / reduced procyclicality 44

45 Reminder: the components of a capital ratio 3 key components: Capital Credit risk + Market risk + Operational risk >8% Each of these 3 components has been adjusted in Basel III 45

46 The components of a capital ratio Capital Credit risk + Market risk + Operational risk >8% 46

47 Definition of capital at present At least six sub-tiers in many jurisdictions: Common equity Tier 1 Non-innovative tier 1 Innovative Tier 1 Upper Tier 2 Lower Tier 2 Tier 3 Complicated system of maximums and minimums for each element or group of elements 47

48 Erosion of the quality of capital Over the past decade or so, the quality of bank capital has eroded Tier 1, which was intended to be the purest forms of capital, was particularly weakened The financial crisis highlighted the fact that many Tier 2 capital instruments were actually debt Going concern vs gone concern issues 48

49 Type of Capital raised 2000 to 2008 ($bn) Debt Preferred Common $1.76 trillion capital raised by above banks $1.64 trillion (93%) of capital raised was in the form of debt Share buy-back (rather than share issuance) of $24.1bn by above banks Source-Viral V. Acharya, Irvind Gujral & Hyun Song Shin, Dividends and Bank Capital in the Financial Crisis of

50 Problems with existing definition of capital Common equity can be just 2% of RWAs Deductions not applied to common equity tangible common equity can be zero or even negative No harmonised list of deductions Weak transparency Global banking system entered the crisis with an insufficient level and quality of capital: Banks had to raise capital and de-leverage Result was a need for massive government support 50

51 Basel II vs Basel III Three Basic Pillars Minimum capital requirements Supervisory review process Market discipline Risk weighted assets Definition of capital Credit risk Operational risk Market risks Core Capital Supplementary Capital Standardised Approach Internal Ratings-based Approach Basic Indicator Approach Standardised Approach Advanced Measurement Approaches Standardised Approach Models Approach 51

52 The new definition of capital Objective: Raise quality, consistency and transparency of Tier 1 Tighten definition of common equity (focus on common shares and retained earnings) Limit what qualifies as Tier 1 capital (regulatory adjustments such as deductions) Main driver of new definition: loss absorption capacity Inclusion based on clear principles Harmonised internationally and simplified New disclosure requirements on Tier 1 composition 52

53 The new definition of capital Just three elements (much stricter definition) Common equity Tier 1 (predominant form of Tier 1) Tier 1 additional going concern capital Tier 2 (gone concern) capital No sub-categories of Tier 2 Elimination of the Tier 3 category (no real impact) Minimum requirements established for common equity Tier 1, Tier 1 and total capital 53

54 Open issues Role of contingent and convertible capital Gone concern capital Define entry criteria See consultative document Proposal to ensure the loss absorbency of regulatory capital at the point of non-viability published in August 2010 Going concern capital BCBS reviewing possible role and use in the new framework 54

55 The components of a capital ratio Capital Credit risk + Market risk + Operational risk >8% 55

56 Denominator better risk coverage The financial crisis highlighted the fact that capital requirements for certain transactions were much too low trading book exposures complex securitisation exposures, off-balance sheet exposures (eg SIVs) counterparty credit risk The Committee increased the capital requirements for many transactions in its July 2009 document New rules for counterparty credit risk are being finalised 56

57 The components of a capital ratio Capital Credit risk + Market risk + Operational risk >8% 57

58 Increase the required level of bank capital The capital adequacy ratio is being raised Minimum common equity requirement will be 4.5% (as compared to the current 2%) A capital conservation buffer of 2.5% will be added to the 4.5% to make a total requirement of 7% common equity to total risk-weighted assets 58

59 Capital conservation buffer Lesson from the crisis: banks were distributing earnings even during stress periods Demonstrated the importance of building capital buffers during good times in order to create a cushion These buffers should be capable of being drawn down Buffer range above the minimum capital requirement established (2.5%) If bank s capital levels fall within this buffer range, constraints on the distribution of dividends, on bonuses and share buybacks (but not on the way the bank conducts its business) 59

60 Countercyclical buffer The Committee has endorsed the creation of a countercyclical buffer that will increase the capital conservation buffer by up to an additional 2.5 percentage points during periods of excess credit growth This buffer will be imposed when a credit bubble has given rise to the build-up of system-wide risk The buffer would be released when, in the judgement of supervisors, it would help absorb losses in the banking system that pose a risk to financial stability 60

61 The functioning of the capital buffers Proposed capital conservation buffer will establish a fixed range above the Tier 1 minimum capital requirement. When a bank s Tier 1 ratio falls into this range it becomes subject to restrictions on distributions Proposed countercyclical capital buffer works by extending size of capital conservation buffer during periods of excess credit growth Countercyclical buffer Conservation buffer Minimum requirements Restrictions on distributions 61

62 Calibration of the Capital Framework Capital requirements and buffers (all numbers in percent) Common Equity (after deductions) Tier 1 capital Total capital Minimum Conservation buffer 2.5 " " Minimum plus buffer Countercyclical buffer range " " but 8.0% under Basel I/II is not 8% under Basel III 62

63 Leverage ratio Another lesson of the crisis: there are circumstances in which risk-weighted capital ratios provide a misleading picture of banks overall health (the risk-weighting rules understate the actual risks, models are flawed, etc) 63

64 Leverage ratio: objectives Objectives: Supplement the risk-based framework with a simple measure based on total assets plus off-balance sheet exposures (no risk-weighting involved) Introduce additional safeguards against model risk and risk measurement error Contain build-up of leverage in the banking system during boom periods Serve as an additional safeguard against attempts to game the risk-based requirements 64

65 Leverage ratio: main features Supplementary measure to risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. Calibration using QIS data to become a binding constraint during periods of rapid credit expansion or when a bank seeks to take on excessive leverage Include off-balance-sheet items (eg credit card exposures) and derivatives Harmonise internationally Reconcile differences across accounting regimes (IFRS vs US GAAP) Simple, transparent and internationally applicable 65

66 Leverage ratio: implementation The leverage ratio will be calculated as an average over the quarter Agreement to have a long transition and an observation phase: Supervisory monitoring from 1 January 2011 Parallel run period from 1 January 2013 and until 1 January 2017 Public disclosure at bank level from 1 January 2015 Migration to Pillar 1 in 2018 (after appropriate review and calibration) Calibration: minimum Tier 1 leverage ratio of 3% during the parallel run period 66

67 Global liquidity standards 67

68 The new global liquidity standard Currently no international liquidity standard Two global liquidity standards to be introduced Liquidity Coverage Ratio (LCR) short-term Longer-term structural ratio: Net Stable Funding Ratio (NSFR) Supplement the 2008 Principles for sound liquidity risk management and supervision 68

69 Liquidity coverage ratio (LCR) Promote short-term resilience by requiring sufficient highquality liquid assets to survive acute stress lasting for one month Stock of high quality liquid assets in relation to net cash outflows over 30-day stress period should be at least 100% 69

70 Net stable funding ratio (NSFR) Lessons from the crisis: over-reliance on short-term wholesale funding Promote resilience over longer term through incentives for banks to fund activities with more stable sources of funding A structural ratio 70

71 Global liquidity standards Liquidity Coverage Ratio (short-term) Stock of high quality liquid assets Net cash outflows over a 30-day time period 100% Net Stable Funding Ratio (longer-term, structural) Available amount of stable funding (ie sources) Required amount of stable funding (ie uses) > 100% 71

72 Introduction of the new liquidity standard New set of standards requires careful approach LCR Observation period from 2011 Introduction as a minimum standard in 2015 NSFR Observation period from 2012 Introduction as a minimum standard in

73 Enhanced governance and risk management 73

74 Enhanced corporate governance Simple fact: without sound corporate governance, capital and other standards are a waste of time! Corporate governance issues are not always deemed important because there is no math involved! (ie, economists can not model governance) The Basel Committee has been working on corporate governance issues related to banks since the mid-1990s Most recent revision of the corporate governance paper was issued at the beginning of this month (Oct 2010) 74

75 Enhanced corporate governance The Principles for Enhancing Corporate Governance address many of the fundamental weaknesses in bank governance highlighted during the financial crisis Key areas covered: role of the board of directors the risk management function compensation issues know your structure the role of supervisors in promoting sound corporate governance 75

76 Enhanced risk management Use Pillar 2 to strengthen risk management (July 2009) Firm-wide governance and risk management Compensation and incentive practices Securitization and off-balance sheet risks Reputational risk Valuation practices (April 2009) Stress testing principles (May 2009) Liquidity risk management principles (Sept 2008) 76

77 Better cross-border bank resolution frameworks 77

78 Cross-border bank resolution Promote more orderly resolution, reduce systemic risk Help address too big to fail problem Current arrangements not designed for cross-border crises Ten recommendations, including: Strengthen national resolution powers Improve firm-specific contingency planning Reduce contagion 78

79 Greater emphasis on macroprudential supervision 79

80 What do we mean by macroprudential supervision? Definition of the macroprudential approach to regulation and supervision: [The] use of prudential tools with the explicit objective of promoting the stability of the financial system as a whole, not necessarily of the individual institutions within it. (BIS Quarterly Review, March 2009) 80

81 What do we mean by macroprudential supervision? Two dimensions are important: Time dimension: how aggregate risk evolves over time Focus on the procyclicality of the financial system Cross-sectional: how aggregate risk is distributed across the financial system at a point in time Focus on common exposures and inter-linkages, and systemic banks 81

82 Addressing procyclicality Make the banking sector a shock absorber as opposed to a shock amplifier Self-reinforcing mechanisms within the financial system and between the financial system and the real economy can exacerbate boom-bust cycles Most prominent in downward phase Most critical (but hidden) in expansion phase: credit mistakes are made during the boom but are revealed only during the bust 82

83 The current Basel Committee approach to addressing procyclicality Dampen any excess cyclicality of the minimum capital requirement Capital conservation buffer: conserve capital to build buffers at individual banks and the banking sector that can be used in stress Countercyclical buffer: achieve the broader macroprudential goal of protecting the banking sector from periods of excess credit growth Promote more forward-looking provisioning 83

84 Countercyclical capital buffer proposal: objective Primary objective : Protect banking sector from periods of excess aggregate credit growth often associated with build-up of system-wide risk Aim is for banking sector in aggregate to have capital on hand to help maintain flow of credit during periods of system-wide stress During times of expansion, potential moderating effect on credit cycle behaviour Microprudential benefit: strengthened solvency of individual institutions 84

85 Countercyclical capital buffer proposal Each jurisdiction responsible for calculating countercyclical capital buffer applicable to all credit exposures in its jurisdiction Methodology developed to assist authorities for taking buffer decisions (credit-to-gdp guide) Buffer subject to an upper bound (to be determined calibration) Home-host issue important and still under consideration by the BCBS Buffer will depend on the location of credit exposures 85

86 Countercyclical capital buffer proposal If capital falls within extended buffer range, a bank would have twelve months to get its capital above top of range before capital conservation buffer restrictions come into effect Proposal published in July 2010 rules finalised by yearend 86

87 Systemically important institutions Expose financial system and real economy to significant risk need to address too big to fail issues Key challenge: measuring systemic importance Basel Committee coordinating work with FSB Factors to consider Size (balance sheet, market share, ) Substitutability (can others provide the same service) Interconnectedness (linkages with other institutions) Policy options include surcharge (capital, liquidity), more intense supervision, living wills / orderly process for winding up 87

88 Implementation 88

89 Allow sufficient time for a smooth transition The timetable for implementing the new standards is very generous This recognises the need for banks to raise capital and retain earnings in order to meet the new requirements It also highlights the Basel Committee s commitment to avoid stifling economic recovery 89

90 Transition to the new regime Basel III: a substantial strengthening of existing requirements Transition arrangements to enable banks to meet the new standards while supporting the economic recovery Transition arrangements : From 2013 to 2018 Gradual phase-in of some provisions 90

91 As of 1 January 2019 Leverage Ratio Supervisory monitoring Parallel run 1 Jan Jan 2017 Disclosure starts 1 Jan 2015 Migration to Pillar 1 Minimum Common Equity Capital Ratio 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% Capital Conservation Buffer 0.625% 1.25% 1.875% 2.50% Minimum common equity plus capital conservation buffer Phase-in of deductions from CET1 (including amounts exceeding the limit for DTAs, MSRs and financials ) 3.5% 4.0% 4.5% 5.125% 5.75% 6.375% 7.0% 20% 40% 60% 80% 100% 100% Minimum Tier 1 Capital 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0% Minimum Total Capital 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Minimum Total Capital plus conservation buffer Capital instruments that no longer qualify as non-core Tier 1 capital or Tier 2 capital 8.0% 8.0% 8.0% 8.625% 9.125% 9.875% 10.5% Phased out over 10 year horizon beginning 2013 Liquidity coverage ratio Observation period begins Introduce minimum standard Net stable funding ratio Observation period begins Introduce minimum standard 91

92 Next steps Situation today: Overall design, content and calibration of Basel III already decided and published Only a few open prudential issues left details of some rules to be finalised Next milestone: November G20 Leader Summit (Seoul) Final and detailed rules expected by year end 92

93 Basel III conclusions Basel III: a comprehensive reform Capital requirements (minimum and buffers), leverage, liquidity Micro and macro-prudential components Main decisions taken final and detailed text expected later this year Significant strengthening of the regulation Banking system should be more resilient in the future Long transition period to avoid negative impact on the economy in the short-term 93

94 More details on Basel III on the BIS website: 94

95 Other important work of the Basel Committee Good Practice Principles on Supervisory Colleges (October 2010) Range of Methodologies for Risk and Performance Alignment of Remuneration (October 2010) Microfinance Activities and the Core Principles for Effective Banking Supervision (August 2010) 95

96 Other important work of the Basel Committee Preparing to revise the Core Principles for Effective Banking Supervision to reflect the lessons learned from the financial crisis Monitoring and providing input into work on revising IAS 39 and other accounting issues relevant for banks Continuing to look at trading book issues 96

97 More details on other work of the Basel Committee on the BIS website: 97

98 Some Reminders Banks need risk managers, not risk scientists. Profits that financial institutions don t understand can be more dangerous than losses they do understand. Off-balance sheet is often more important than onbalance sheet. Contagion is a major force in a globalised and securitised world. Capital is no substitute for liquidity and liquidity is no substitute for capital. New problems are often old problems we ve forgotten. Change is one thing, progress is another. 98

99 Questions Elizabeth Roberts Director Financial Stability Institute Bank for International Settlements 99